The up side of outsourcing

Date: January 11 2013

Outsourcing is not just a cost-saving measure for Australian business — it is crucial to our engagement with Asia in the 21st century, reports Matthew Wade.

If you want an insight into the Asian century, meet Ruchir Punjabi. He was born in the city of Ahmedabad in western India and he moved to Australia, aged 18, to study computer science at Sydney University. After graduating, he started a web design business called Langoor – an Indian word for monkey. Punjabi, 26, now employs six people in Sydney and more than 40 in India's high-tech hub, Bangalore. He flits across the Indian Ocean every few weeks serving a growing band of clients in Australia and the subcontinent.

Punjabi says campus life in Australia changed the way he thinks and his adopted home's wealth, stability and diversity convinced him it would good place to launch a business.

"Australia's biggest asset is multiculturalism, not mining," he says. "It's an incredible advantage but Australia's going to have to figure out how to use it well."

The international, multicultural character of Punjabi's firm is likely to become far more common. Ken Henry, author of the government's Asian century white paper says many businesses that now define themselves as Australian must begin viewing themselves as regional in order to thrive. They'll become more integrated with regional supply chains and partner more often with similar, or complementary, outfits overseas. Inevitably, some components of their business will be done in Asia.

"Not that that last option is always easy," Henry told the Australia Industry Group last August. "There's often serious criticism, from the media, unions, workers and local communities, of any company that decides to shift some of its operations offshore. But we rarely hear about the new jobs that are being created as a result of such actions, or that job losses might have been even greater had the company not adjusted to new realities."

Henry illustrated his point with the iconic Tasmanian bootmaker, Blundstone, which moved elements of its manufacturing to Asia five years ago. While the decision drew fire at the time, it stopped Blundstone from going out of business and allowed key operations, which employed skilled workers, to remain in Australia.

Tamerlaine Beasley, founder of Intercultural, a firm that advises businesses on working in other countries, says the "old bilateral" trading model is increasingly irrelevant.

"Some businesses think in terms exporting from country A to country B . . . but the world has changed – it's now a far more complex and interconnected market than many people understand."

There are competing Australian storylines about Asia's historic economic transformation. The dominant one at the moment is all about opportunity. It focuses on how demand for Australian goods and services will boom as the region's cashed-up middle-class swells over the next couple of decades. One of the principle advocates of this version of the Asia story is the Prime Minister, Julia Gillard. "The world economy is coming our way," she declared at the launch of the Asian century white paper. With the right plan, Asia will be a new market for "a high-wage, high-skill Australia" she claims.

But there's another more menacing Asian century narrative. It focuses on how low-cost but increasingly well-educated workers in the region are using information and communication technologies to destroy jobs in the service sector, which employs about 80 per cent of Australian workers. Advocates of this narrative – especially the trade unions representing service sector workers – warn of an Australian white collar jobs "crisis". A union-funded report by the National Institute of Economic and Industry Research (NIEIR) released last October found more than 20,000 jobs being moved offshore each year and it predicted "between 700,000 and 1 million" more jobs would go over the next two to three decades. The institute warned of a "vicious cycle" of off-shoring that will strip skills and competencies from the domestic economy and, ultimately, leave Australia much worse off.

Jobs likely to be most affected were in information technology, administration, finance and insurance and the professional, scientific and technical services sectors.

How should Australia respond?

Old-style protectionist strategies to shield service sector jobs from competition will be expensive and probably futile.

"I don't think there is any appetite in Australia for those sorts of policy initiatives," says Michael Spencer, the author of the NIEIR report.

The Australian government advocates greater openness in the global trade of services, not more restrictions. But Spencer says governments should do much more to ensure the Australian services sector is globally competitive.

"We need to ask what we can do to strengthen our hand in this increasingly globalised sector," says Spencer.

"There are very strong countries in the global services trade with very large and powerful providers and we need to position ourselves so we have a strategy for how we are going to maximise those opportunities."

The "powerful providers" Spencer refers to are part of an Asian century phenomenon that gets surprisingly little attention – the global outsourcing industry enabled by information and communications technology. Spencer warns that unless the Australian service sector is better prepared it will be "like sending someone out in a dingy to compete with a super tanker."

"I think a lot of people around the world don't understand the extent to which the services sector is traded these days and we, as a country, need to find our role in that and not get caught out," he says.

India has become a hub for the global outsourcing industry and millions aspire to the relatively high salaries paid by business process outsourcing firms. The industry features regularly in Indian popular culture including Bollywood movies and television shows. Bestselling author Chetan Bhagat sold more than 1 million copies of his novel, One Night @ the Call Centre, which tells the story of six young workers who sell home appliances to foreigners by phone.

A clutch of Indian companies specialising in business outsourcing have developed unique expertise and now have large international operations. India's biggest outsourcing firm, Genpact, has annual revenues of about $US1.3 billion, employs more than 60,000 workers in 20 countries, and is listed on the New York Stock Exchange. Some of Australia's biggest financial institutions are among its clients.

The global outsourcing industry has thrived on economic crisis. After the dotcom crash of 2001, struggling US tech firms cut costs by sending operations offshore, triggering a boom for IT service providers in India. India's business process outsourcing firms – or BPOs as they are known – then prospered when the global financial crisis smashed the US finance sector. As the global economy plunged into recession in 2009, India's 20 biggest BPOs increased their export earnings by 15 per cent. India's business process outsourcing industry generates more than $US40 billion a year and employs more than 3 million people. By the early 2020s, India's IT and BPO sector is projected to employ 7.5 million workers. But India faces stiff competition from BPOs across Asia, Africa and South America.

The Philippines has been very successful in attracting call centres, many of them set up by Indian outsourcing firms seeking lower costs. Business consultant Pradeep Khanna estimates the Philippines' outsourcing industry generates about $7.5 billion a year.

"It's become very much a globalised service delivery world," he says.

Now the price dynamics in the global services trade are shifting.

At first relatively simple tasks like call centres and data management were outsourced. But the focus has moved to much more complex – and valuable – areas such as business analytics. Sri Annaswamy, the director of outsourcing consultancy firm Swamy and Associates, says reducing costs is no longer the only driver.

"In the late '90s outsourcing was purely about cost," he says. "But today, that's often not part of the equation at all. Now it's all about what it can contribute to improving my revenue and that is a game in which Australia can compete."

Annaswamy says Australia should do all it can to get a stake in the growing global market for high-skill knowledge-based services.

"A new wave of outsourcing is being created – analytics – and Australia should not miss out on it," he said.

"These are less dependent on cost outcomes and more based on the ability to deliver insights. Australia needs to make sure it gets its share of these jobs."

Khanna also sees an opportunity.

"The challenge is that we'll have to keep continuously innovating," he says. "We need to be positioning ourselves in the information economy and move up the curve."

That's where government has a role, says Spencer.

"We need to get a clear idea of how government, industry, the education and training sector – all these – can work together to get us a critical mass," he says.

"We need to find our niche in the [services sector] supply chain – the stuff Australians can do well – and position ourselves for that."

The NIEIR report calls on governments to urgently develop an industry strategy for the service sector, led by a high-level task force reporting directly to relevant cabinet ministers.

Annaswamy goes further – he wants governments to provide "incentives" for international business services firms to locate in Australia. But he fears both government and private sector are not taking the opportunities – and threats – seriously enough.

"Australian companies tend to be very laid back about these major trends and the Australian government seems to be completely ignoring it," he said.

Punjabi's business illustrates how economic change in Asia is already reshaping the way many Australian firms do business.

He can reel off projects that would never have gone ahead without his distinctive workforce that spans Australia and India.

For example, Punjabi's web design services would have been too expensive for a project he delivered for a not-for-profit client if not for his low-cost Indian workers.

"When I was talking to people here in Australia and told them I had an India operation, they would ask me if I could have work done at a lower cost," he said.

"I can offer Australian quality with a 40 or 50 per cent discount."

Punjabi's expansion into India – which helps keep his Australian workers in a job – also depends entirely on his Indian staff.

His story shows how the national debate about offshoring needs to be much more sophisticated.

"It's not always as simple as just moving jobs from one location to another," says Beasley.

"It's enabling Australian businesses to survive by engaging with regional markets."

This material is subject to copyright and any unauthorised use, copying or mirroring is prohibited.